With no pension reform, PA at risk for credit-rating downgrade

When Gov. Tom Corbett signed Pennsylvania’s $29 billion budget last week, he cut the legislature’s budget by $65 million and chastised them for failing to pass pension reform.

“The General Assembly left Harrisburg earlier this month with unfinished business,” Corbett said. “They need to come back and enact pension reform.”

The first consequences of not addressing the state’s growing pension costs appear to be imminent, according to a recent Bloomberg article.

Two of the big three credit rating agencies, Standard & Poor’s and Fitch Ratings, told Bloomberg they will be considering a rate cut in the next couple of months.

Standard & Poor’s currently gives Pennsylvania a AA rating, which is its third-highest rating. Fitch also gives the state a AA rating, but with a negative outlook.

Eric Kim, a Fitch director, told Bloomberg that a cut was “certainly more likely than not.”

The other big credit-rating agency, Moody’s, already rates Pennsylvania’s credit below the U.S. state average.

Bloomberg quotes Paul Mansour, the head of municipal research at Conning & Co.:

“When you have high debt burdens and high pension burdens, those things don’t go away quickly,” Mansour said. “I don’t see a catalyst for improvement for Pennsylvania in the near future.”

The state’s pension funding ratio, which compares a pension plan’s assets to its liabilities, has continued to fall over the past four years. The state’s two pension plans were 80 percent funded in 2009, 75 percent funded in 2010 and only 62 percent funded in 2013.

“The longer that the state goes without addressing this liability, the larger the liability becomes and the more pressure they can find down the road on their finances and on their rating,” S&P’s [analyst John] Sugden said.

There’s a fear that Pennsylvania’s recent cigarette tax increase will drive smokers to buy cigarettes in neighboring states at a lower cost. On Monday, a $1 per pack tax increase on cigarettes went into effect, bringing the total state cigarette tax to $2.60 per pack.